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Friday, November 25, 2011

The Mills of the Gods Grind Slowly

IN RE: BRYEN, Cite as 106 AFTR 2d 2010-5835, 08/13/2010

This was originally published on October 4th, 2010.

There are a number of sayings that I have accumulated over the course of my business career. Some I have even coined myself. An example of the latter is what I perceived to be the essence of business wisdom that my first managing partner, a second generation CPA, had distilled from perhaps a century of family public accounting experience (counting his father and his brother). "Money coming in is good. Money going out is bad." In my callow youth, I thought of that as ironic.

A real favorite, which I did not coin, is the saying "It is better to be lucky than good." (There is a contra saying that states a strong positive correlation between luck and hard work). A corollary is the observation "There but for the grace of God, go I." (Joan Baez says "fortune", but I don't find that as poetic.) That is what I reflect on contemplating the fate of Bruce Bryen, a fellow CPA.
Like Mr. Bryen, I devoted a significant part of my early professional career to tax shelters. I was fortunate in two regards. The first was that the tax shelters that my firm was involved in were quite legitimate. Shelters were attacked on a variety of grounds, one of which was that there was not a real desire for an economic return exclusive of the tax benefits. The "for profit" requirement was, however, relaxed in the case of tax shelters designed to promote low income housing, since Congress wanted people to put money into low income housing without expecting to get large economic returns or any economic return at all as it often turned out. My other piece of luck, if you might call it that, was not making enough money prior to 1986 to be tempted to buy any of the things myself.

Mr. Bryen became involved with "employee leasing" shelters. This was a type that escaped my notice in what turned out to be the waning days of real tax shelters. I may not appreciate the fine points, but the deals worked something like this. A partnership borrowed money from an operating company. The partnership then hired all the people who worked for the operating company and leased them to the operating company. The lease payments were deferred and the partnership was on the cash basis. When the partnership switched to the accrual basis it adopted a four year spread. The thing about a shelter like this is that it was pure deferral. Real estate held out the promise of conversion. That is that the income when it turned around on you would be a capital gain. Regardless, Mr. Bryen and his father, also a CPA, did quite a few of these deals. The IRS ended up making a project out of it. Finally, in 1996 one test case was heard with the decision to be binding on over 120 cases. Bealor v. Commissioner, 72 T.C.M. (CCH) 730, 1996, as you might guess found that the employee leasing arrangement was a sham. Among the facts noted was that the original "loan" by the corporation to the partnership was handled by a check that never was introduced into the banking system.

So this is all ancient history. These were cases from 1980 - 1988. The particulars aren't all that interesting because there are several law changes that would kill these deals as shelters even if they were respected. That's not what this story is about.

What happened after the Bealor decision is where it gets interesting. Given this whole test case concept you would think that Mr. Bryn would have gotten a bill sometime in 1996 or maybe 1997. That's not what happened. Here's what happened :

Once the Bealor Decision was final, the Debtor knew that he would be subject to additional tax liability and that the IRS would send him notice of the amount the IRS believed that he owed. While the Debtor knew that he also would be subject to interest and penalties, he did not know, at that time, the precise amount of additional tax that ultimately would be assessed.

For approximately five (5) years after the Bealor Decision was issued in 1996, the Debtor did not receive any communication from the IRS regarding the specific amount of his additional tax liability.

On June 27, 2002, the parties' negotiations culminated in the Debtor signing three (3) stipulations with the IRS All three (3) stipulations stated that the Debtor owed taxes due to substantial underpayment attributable to tax motivated transactions.

The total tab tax and penalties was $2,808,444. Then they added the interest. That brought the total tab to $13,556,124.82. Mr. Bryen's total payments on this obligation were exactly 0. The court noted that in the years from 1996 to 2003 Mr. Bryen's income ranged from the mid sixties to as much as $190,000. In 2004, when he filed for bankruptcy his projected annual income was $125,000. He listed 23 million dollars in debts of which 19 million was due to the IRS. (I don't know how it got from 13 to 19. It probably doesn't matter).

The court describes Mr. Bryen's lifestyle during this period in what to me sounds like a critical tone. He spent as much as $25,000 on travel in some years and shared the expenses of a beach house owned by his girl friend, whom he subsequently married. They spent $5,000 on their wedding the cost being evenly split between them.

I have this real mental split about how I respond to amounts of money. I have a rule with my kids that they can't use the word "only" in conjunction with any sum of money greater than four dollars (My kids are 17 and 21, by the way). I've not had a particularly onerous life, but as a teenager living with my mother, I was technically below the poverty line. When I was in VISTA, I used to consider how many cans of tuna fish I had to be a significant portion of my net worth. To this day, I get a warm fuzzy feeling when I open the cabinet and see 10 or more cans of tuna fish. So I understand the perspective that sees Mr. Bryen living real high during that period. On the other hand I've lived in a business world not that far removed from Mr. Bryen's where an income of $150,000 might be referred to as a buck and a half. The court is criticizing Mr. Bryen because he didn't live a frugal lifestyle for the five years that the IRS spent dithering after they won the Bealor case. The thing is that you could have teamed up Suzie Orman and my mothers friend "Aunt" Melba, who would mix four cans of water with the frozen orange juice, to run Mr. Bryen's life while he was waiting for the hammer to fall and he might have been able to save up something like $300,000 or so. In which case he would have owed more than he could ever conceivably pay. Choosing instead to live a less than frugal lifestyle he ended up owing more than he could ever conceivably pay.

The court did not say how much of a payment would have made a difference, but since he paid nothing and lived high on the hog for those five years, his debt was not discharged in bankruptcy. I'd love to have some comments from people who work with collections as to how they think this drama will play out from here.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

Declaration of the Rights of Man

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.